The Fixed Income Brief: Rates Lower Again as Washington Continues to Squabble

Initial unemployment claims fell by 249,000 to 1.2 million for the week ended August 1st; this marks the lowest level of jobless claims since the start of the shut-down but still shows the continued significant impact the virus is having across the nation. Though still hovering around historical highs, the decrease is leading markets to see this as improvement given how the recent wave of the virus continues to impact various areas of the country. Equity markets took this news to be positive and rallied, however, the bond market remains weary of the recovery happening anytime soon. As a result, we saw U.S. Treasury rates fall on back of the release.
Washington dysfunction also remains top of mind for investors as the extra $600 a week in pandemic-related unemployment benefits ended last week. Even though the gap seems to have narrowed between finalizing a massive fiscal stimulus agreement, hopefully lawmakers are aware that if something does not get done in a major way this weekend, markets will be hard hit in the week to come.

Treasuries move lower on the week; investors look to see how T-notes perform in the auction

Treasuries rallied as investors digested the latest employment data and remain optimistic on the next stimulus package. Treasury will auction $48 bn of a 3-year note (08/11), $38 bn of a 10-year note (08/12), and $26 bn of a 30-year note (08/13). This will be their first issuance out the curve since the Treasury increased the size of auctions and Fitch dropped the rating outlook to negative.
08.09.2020 – Chart 1 – WoW yield curve 748×363
08.09.2020 – Chart 1.1 – WoW yield curve 756×282

Bond and credit index spreads end the week tighter

All major credit indices traded tighter on the week, besides the iTraxx Japan which ended slightly wider. Corporate bond spreads also ended tighter on the week, most notably on the long end of the curve. HY continues to rally coming off its best month since 2011.
08.09.2020 – Chart 2 – Corporate spread curve 741×349
08.09.2020 – Chart 2.1 – WoW spreads 753×232
08.09.2020 – Chart 3 – Credit index spreads 806×172
All credit sectors rallied this week. In the single-A space, communication services, materials, and healthcare sectors were the standouts week-over-week. Some of the recent outperformance could simply be playing catch up as these sectors had lagged in the recent rally month-over-month, where financials and energy have performed the best.
08.09.2020 – Chart 4 – Spreads by sector for single A rated bonds 913×21608.09.2020 – Chart 5 – Spreads by rating 490×209

Downgrades outpace upgrades where 75% of rating changes came in the HY space

This week saw 11 downgrades compared to 4 upgrades. Most notable downgrades on the week were Boston Properties and Xerox Corp, as both businesses have had difficulty driving revenue throughout the economic shutdowns.
08.09.2020 – Chart 6 – S&P ratings changes this week 723×374

Muni yields follow the move lower in yields as demand continues to outstrip supply

Market technicals, where more cash is available vs bonds being issued, have overridden the weakening fundamental outlooks for state and local governments. It looks like muni rates will remain lower for longer as the demand for very safe assets combines with the likely probability of future tax changes, due to the November general election, creating a perfect backdrop.
08.09.2020 – Chart 7 – Muni yields by rating and duration 766×389
*Disclosure on all charts: Figures shown above are the weighted aggregate of bonds that currently have an IDC price and based off transactions over the past 2 weeks. This will create for anomalies in the data but aligns with our effort to reflect actual market conditions.

Fixed Income Trivia Answer: World War I

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